UV Letters

PAY UP!

In this week’s post, I welcome Katherine (Kate) Lee Carey, Special Counsel in the Education Practice Group of Cooley, a bon vivant and – even more rare – a lawyer with a sense of humor.

Ryan: Welcome Kate! I thought folks might welcome your thoughts on the Department of Education’s newest regulatory salvo, the Borrower Defense to Repayment (BDTR) rules that were proposed last month.

Kate: Aha. So you want counsel without having to pay for it.

R: More like free advertising for Cooley.

K: Touché. Well have you ever known anyone who thought a rule didn’t apply to them?

R: Sure. In college the magazine I founded was approached by a student who had hacked into the Yale Library system.

K: They had hackers back then? Did you have to use a giant hand-held phone and link up to a supercomputer like in the movie “War Games”?

R: A proto hacker, no doubt. In any event, he wanted us to reveal that all these top administrators had unpaid library fines. It made him mad that they thought the rules didn’t apply to them.

K: So did you write about it?

R: The cover was too good to pass up. PAY UP! in huge font alongside a photo of the provost and a caption stating that she had an outstanding library fine of $3.00.

K: Was it true?

R: Oh yes. We also encouraged many faculty and administrators to catch up on their reading.

K: How so?

R: The hacker provided us with a record of the last time they checked out a book. The Dean of Yale College hadn’t checked out a book in nearly three years. The Dean of the Graduate School (and future President) had gone over a year. And the Director of Dining Halls had never checked out a book.

K: You guys were like Woodward and Bernstein. Very impressive. Did you get in any trouble?

R: All good until the Feds came knocking. Kidding! But what does this have to do with BDTR?

K: Let me give you a little background. First, it is important to understand that the 200+ pages of ED’s proposed BDTR rulemaking is based on one sentence in the Higher Education Act: “Notwithstanding any other provision of State or Federal law, the Secretary shall specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a loan made under this part.” Period. That is the law in effect since 1993. In 1994, ED did issue regulations, just a little more informative, that stated that a BDTR claim must be based on a school’s “act or omission” that “would give rise to a cause of action against the school under applicable State law.” So, still not much to work with.

Until the sudden collapse of Corinthian Colleges, when the Department of Education (ED) started publicizing the BDTR rule, it had only been used as the basis for relief five times. So ED didn’t have any processes in place to review and decide the claims. Since Corinthian, they’ve had around 20,000 new claims. So not having clear guidelines was a problem. Last fall, ED hired a “Special Master” to start looking at the process, and his feedback was that they needed some consistent standards for the submission and evaluation of these claims. That resulted in a federal rulemaking process to replace the old BDTR rule. The result is proposal for a new, vastly expanded rule that could go into effect as early as next July 1.

One major difference is the basis for a student claim. The old rule requires a student to show that his or her school’s violation of state law caused the student harm. The new rule establishes a set of new claims that a borrower could make to get out of paying off his or her loan: a breach of their contract with the school; a substantial misrepresentation by their school (even if unintentional); or a legal judgement against the school. For all three, the claim must be related to their loan, or the educational services it paid for. There are essentially no statutes of limitations on any these claims, and the ED intends to pursue the institution to get the money back.

R: So BDTR applies only to for-profit colleges, right?

K: Wrong. It applies to every school, college and university that participates in the federal student loan program. But right now, based on the way these new rules have evolved and been presented, it’s easy to see why everyone believes this is just a for-profit school issue. No one is talking about the impact on traditional public and non-profit colleges and universities. Right now, what we like to call “traditional” schools are sort of like your Yale administrators who didn’t think they needed to pay their library fines.

R: What’s the potential impact?

K: The proposed BDTR rules go far beyond the process by which defrauded borrowers can petition the Department to have their loans discharged. The bigger risks for colleges and universities are the new financial responsibility standards and obligations introduced in the proposal, which ED says are intended to ensure that when loans are discharged, the colleges and universities can afford to foot the bill and to give ED the means to identify what it considers to be “at risk” institutions.

R: How?

K: The Department’s public explanation is that creating financial responsibility “triggers” will let ED know if a school is at risk of closing, or at risk of not having the financial means to pay ED back for the loans it discharges. The new rules state that for each one of these “triggers,” the institution would be placed on provisional certification and required to post a letter of credit equivalent to at least 10% of its previous year’s federal student aid funds, at least for private colleges and universities (public institutions are viewed as supported by the full faith and credit of their state). The triggering events requiring a letter of credit are broad, and in some cases could easily arise from potentially innocuous events that don’t effect the school’s finances or its ability to operate and in most cases, have nothing to do with BDTR , including: “excessive” borrower defense claims; “excessive” liabilities that are owed to state or federal agencies; being
sued or investigated by a state, federal or other agency, or sued by private parties, where the claim exceeds 10% of the school’s current assets; certain accreditor actions including being put on probation; violation of a loan agreement provision between the school and a lender; if a gainful employment (GE) program is failing or in the zone and more than half of the GE students are enrolled in that program; and if cohort default rates exceed 30% for two years.

The private lawsuit provision is particularly troubling: the amount claimed in a lawsuit often bears no relationship whatsoever to the real value – if any – of the claim. But if this provision makes it into the final rule, plaintiff’s lawyers will immediately grasp that a great negotiating tactic will be to
threaten a large-value lawsuit.

ED also retains the discretion to require a letter of credit for “other events” that it thinks might have a materially negative impact on a school such as, among other things, “significant fluctuations” in Title IV funds that the school receives from one year to the next or
a citation by a state agency that the school has violated a state rule or regulation.

What is even more problematic for most colleges is that each of these triggers is cumulative, so an institution that, say, has a lawsuit filed against it (mind you this is based on ALLEGATIONS not an actual verdict or settlement) and at the same time, has an accreditor issue – which could be in response to the lawsuit, or completely unrelated – the institution would be required to post TWO irrevocable letters of credit amounting to a minimum of 20% of the previous year’s federal student aid received.

R: Letters of credit don’t come cheap. In most cases, they have to be collateralized with cash, and involve substantial fees.

K: Right. So, a college could be faced with a frivolous legal claim and an accreditation violation and be required to set aside 20% of its federal student aid revenue from the previous year to fund a letter of credit. A typical non-profit college that is 90% dependent on tuition revenue, and half of whose tuition revenue is from federal student aid, might have to sequester almost ten percent of current revenue. And since an endowment cannot generally be used to back a letter of credit, and having large savings is not an attribute of many smaller institutions, this could pose a grave financial risk. At the very least it could adversely affect the school’s own scholarship programs and its ability to maintain and improve its educational offerings.

R: That could be game over for some schools.

K: Definitely. What’s more, even setting aside the LOC issue, regardless of whether an institution is public or private, these triggering events immediately place the institution in a provisional certification status with ED. What that means logistically is that the institution can continue to participate in the student aid programs, but they do so in a status with additional ED oversight, a loss of due process provisions, growth restrictions on campuses and programs, additional reporting, and heightened cash monitoring which affects the timing of access to student aid.

R: Wow. I assume traditional colleges and universities are mustering all the resources of 1 Dupont Circle against these new rules?

K: If they are concerned, they’ve been awfully quiet about it. The traditional schools spent most of the negotiated rulemaking sessions quietly avoiding the line of fire, leaving the student consumer groups and the representative from the for-profit institutions debating over the proposed rule. And even now, there is been barely a peep from 1 Dupont Circle. So I’d say they’re responding to this rule the same way your college administrators did to their library fines.

R: Either they don’t know that they have a problem, or they are just hoping it doesn’t impact them?

K: Right on both. A few weeks ago I presented on a panel focused on the proposed BDTR rule at a conference of attorneys who represent only public and non-profit colleges. And despite repeatedly emphasizing that these rules apply to all Title IV institutions and answering follow-up questions from several public and private non-profit institutions asking if the rule applied to their institutions (to which I repeatedly said “YES!”), I received an e-mail from an attendee a few days later asking: “So this doesn’t
really apply to us, right?”

R: Sounds like these schools may need to PAY UP!

K: Except they’ll end up paying a lot more than $3.00 if the rule goes through as proposed.
Colleges and universities still doubting that ED will be aggressive in collecting should look no further than the $43B estimate that the Congressional Budget Office has provided for the annual cost of BDTR. Since ED's current annual budget is less than this, you can bet ED will be asking schools to pay up for forgiven loans.‎ Otherwise, the impact on the federal budget is unfathomable.
So, maybe WAKE UP would be a better message. The proposed rules are still just that: proposed. We are well into the period for public comment, which ends August 1. There is still time for the thousands of affected public and non-profit institutions to raise concerns. No one is arguing that ED should not be trying to better protect students who have been defrauded or preyed upon, but that has to be done in a way that limits frivolous claims and avoids crippling good schools.

University Ventures (UV) is the premier investment firm focused exclusively on the global higher education sector. UV pursues a differentiated strategy of 'innovation from within'. By partnering with top-tier universities and colleges, and then strategically directing private capital to develop programs of exceptional quality that address major economic and social needs, UV is setting new standards for student outcomes and advancing the development of the next generation of colleges and universities on a global scale.

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